Stanimira Milcheva and Steffen Sebastian University of Regensburg Housing Channels of Monetary Policy Transmission in European Industrial and Transition Countries

Motivation What is the role of the housing market in the monetary policy transmission to consumption and residential investment? Hypothesis: Housing markets play an important role for the transmission of monetary shocks to consumption and investment in countries with flexible and well developed mortgage markets. Milcheva Housing Channels of Monetary Policy Transmission

Housing Channels of Monetary Policy Transmission Credit channel Interest rate channel Monetary policy shock Cost of capital effect Tobin‘s Q effect Interest rate income effect Rents and savings effect Housing wealth effect Collateral effect Residential investmentConsumption House Prices Milcheva Housing Channels of Monetary Policy Transmission

Institutional factors CountryMortgage AverageTotal outst.PrevailingMortgageRefinancing marketdebt outst.typicalsecuritizationtype ofequity(fee-free index of(from MFIs)LTV ratiofrom resid.mortgagewithdrawprepayment) completenessto GDP lendingrate(MEW) Year Austria31%25.3%84%-variableno Belgium34%39.8%80%80,0%fixed (>10y)no Denmark82%95.3%80%80,0%fixedyes Finland49%47.5%70%70,0%variableyes France23%35.9%91%91,0%fixed (>10y)no Germany28%46.1%72%72,0%fixed (>5y)no Greece35%32.0%58%58,0%variableno Ireland39%80.0%83%83,0%variablelimitedyes Italy26%19.8%65%65,0%variableno Netherlands71%99.1%100%100,0%fixed (>5y)yesno Norway59%53.3%70%70,0%variableyesno Portugal-63.3%56%56,0%variable-no Spain40%62.0%61%61,0%variablelimitedno Sweden66%60.6%80%80,0%fixed (>1y)yes UK58%80.5%77%77,0%variableyeslimited US98%77,0%75%75,0%initial fixedyes Bulgaria-11.6%80%-90%0%variable-- Czech Republic-10.8%56% --- Estonia-39.2%100%0%initial fixed-- Hungary-14.0%61%48%fixed until Lithuania-17.3%75%0%variable-- Poland-15.6%90%1%variable-- Slovenia-9.1%61%0%variable-- Milcheva Housing Channels of Monetary Policy Transmission

Methodology Estimation of vector autoregression (VAR) models for 21 European countries and the US. Counterfactual simulation of impulse responses. (see Bernanke et al. (1997)) Milcheva Housing Channels of Monetary Policy Transmission

Existing Literature Ludvigson et al. (2002): SVAR with total wealth, counterfactual simulation, US, 1966:1 – 2000:3, insignificant effect of the wealth channel on consumption in the US. Giuliodori (2005): VAR with house prices, counterfactual simulation, 9 European industrial countries, 1979:3 – 1998:4, house prices play an important role for the transmission of monetary policy shocks to GDP in countries with well developed housing markets, such as Sweden, Spain, the Netherlands. Elbourne (2008): SVAR with house prices, counterfactual simulation, UK, 1987:M1 – 2003:M5, house prices play a small role in the monetary policy transmission mechanism. Milcheva Housing Channels of Monetary Policy Transmission

Contribution A more in-depth study of the monetary policy transmission through housing Broader sample of countries, including Central and Eastern European (CEE) countries Same model applied to all countries Accounting for structural breaks Time period after the liberalisation of the mortgage markets Specifying the role of each housing channel on consumption and investment Accounting for significance of simulated impulse responses Milcheva Housing Channels of Monetary Policy Transmission

Data Countries Industrial countries: AU, BE, DK, DE, GR, FI, FR, IR, IT, NL, NO, ES, SE, UK, US CEE countries: BG, CZ, EE, HU, LT, PL, SI Estimation periodFrom mid-1990s to 2008 (quarterly) Variablesconsumer price index household consumption gross fixed capital formation in housing house price index money market rate Milcheva Housing Channels of Monetary Policy Transmission

Results: Shock in IR HP Milcheva Housing Channels of Monetary Policy Transmission

Results: Shock in IR HP Milcheva Housing Channels of Monetary Policy Transmission

Countries with significant housing wealth/collateral effects Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response. Milcheva Housing Channels of Monetary Policy Transmission

Countries with significant housing wealth/collateral effects Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response, blue line: simulated respinse when GFCF=0 in consumotion equation. Milcheva Housing Channels of Monetary Policy Transmission

Results: Shock in HP GFCF Milcheva Housing Channels of Monetary Policy Transmission

Countries with significant Tobin‘s Q effects Dark blue line: estimated impulse response, red line: simulated impulse response of consumotion to an interest rate shock. Milcheva Housing Channels of Monetary Policy Transmission

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Milcheva Housing Channels of Monetary Policy Transmission